UPDATE 1-Czech economic flexibility little improved-report

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By Jan Lopatka

The Czech economy has not raised its flexibility significantly over the past year and the budget deficit will not fall sustainably unless further reforms are made, the central bank and the Finance Ministry said.

Their annual joint assessment of the Czech Republic's convergence towards adopting the euro confirmed an earlier stance that it has not progressed enough to set a target date for joining the euro zone.

The cabinet approved the assessment on Wednesday.

"The state budget proposal for 2008 and the mid-term outlook for 2009-2010 ... does not create conditions for a sustainable reduction of the government sector deficit and securing long-term health of public budgets," a draft of the document obtained by Reuters said.

"Significant progress has not been made also in the area of raising the flexibility of the Czech economy, especially of the labour market," it said.

The government expects a deficit of 3.4 percent of gross domestic product this year, falling to 2.95 in 2008 and 2.3 percent in 2010.

"The recommendation not to set a target date at the same time implies a recommendation for the Czech Republic not to attempt an entry into the ERM-2 mechanism in 2008," said a draft of the document obtained by Reuters.

The Czechs aim to spend only the minimum required two years in the ERM-2 currency regime, which allows fluctuations of up to 15 percent on either side of an agreed central parity rate against the euro.

Therefore the government plans to join the ERM-2 only when it can expect with a high probability that euro entry will follow after the two-year period.

The Czechs have dropped 2010 as their euro entry target date due to the budget deficits and the need for reforms mainly in the pension and health sectors, and the centre-right cabinet appointed in January has refused to set a new date.

It has said it was looking beyond 2012 for euro adoption but it made no sense to set a firm target before the key reforms are put in place. (Reporting by Jan Lopatka; editing by Mike Peacock))

Keywords: CZECH EURO/

[PRAGUE/Reuters/Finance.cz]